I take a conservative, evangelical, economistical look at things. I will be posting intermittently, for reference rather than daily reading.
My Wordpress site from before 30 September 2007 is at http://rasmusen.org/x. It is searched from the search engine below(not above).

Wednesday, February 11, 2009

Krugman, Barro, and Crook

Clive Crook wrote an FT column
about economists blogging, citing Barro and Krugman as examples of economists who went to extremes. Part was this:

I had thought they would at least agree that raising trade barriers at a time like this must be a bad idea. Then I read Paul Krugman, Nobel laureate, Princeton professor, and New York Times columnist, explain that raising tariffs – though perhaps unwise for other reasons – “can make the world better off”. “There is a short-run case for protectionism,” he went on, “and that case will increase in force if we don’t have an effective economic recovery programme.” What are his readers to make of this? Are all the economists who say otherwise just wrong?

This impression of disarray – that economics has nothing clear to say on these questions – is not the fault of economics as such. It is a mostly false impression created by some of its leading public intellectuals, Mr Krugman among them.

Economics outside the academy has become the continuation of politics by other means. If you wish to know what Mr Krugman thinks on any policy question, do not read his scholarly writings; see which policies are advocated by the progressive wing of the Democratic party. Mr Krugman agrees with liberal Democrats about most things, and for the rest gives as much cover as the discipline of economics can provide – which, given its scientific limitations, is plenty. He does this even on matters where, if his scholarly work is any guide, the economics is firmly against his allies. Liberal Democrats are protectionists. Mr Krugman is not, but politics comes first.

The syndrome affects economists on the right as much as on the left. Just as there is a consensus among economists that protectionism should be opposed, most economists believe that a powerful fiscal stimulus is both possible and desirable in present circumstances, and that the best stimulus would include big increases in public spending. Yet recently, Robert Barro, a scholar with conservative sympathies, wrote in the Wall Street Journal that this view was an appeal to “magic”.

The problem is not that Mr Krugman questions the consensus on trade (if indeed he does), or that Mr Barro questions the consensus on fiscal policy (as he certainly does). It is that both set the consensus aside so carelessly. In doing so, these stars of the profession destroy the credibility of their own discipline. Mr Krugman gives liberals the economics they want. Mr Barro gives conservatives the same service. They narrow or deny the common ground. Why does this matter? Because the views of readers inclined to one side or the other are further polarised; and in the middle, those of no decided allegiance conclude that economics is bunk.

What is interesting is not that article (which is wrong on Barro, I think), but the responses of Professors Krugman and Barro. Mr. Crook displays the correspondence in The Atlantic. Barro and Crook had a polite exchange of emails discussing their disagreements. Krugman said,

Clive used to be a reasonable guy; in his mind he probably still is a reasonable guy. But he has misunderstood what it means to be reasonable. He now apparently believes that it means declaring, in all circumstances, that Democrats and Republicans are equally in the wrong, even if the Democrats are talking Econ 101 and the Republicans are being led by the crazy 36.

And it means hysterical attacks on yours truly for actually taking sides in this debate, with the ostensible basis for the denunciation being a wonkish blog post -- it says so in the title -- in which I acknowledge that there is a potential short-run argument for protectionism, while making it clear that I'm not in favor of acting on that argument. He doesn't actually take on my argument; he just insists that the only reason I might possibly have said anything like this is partisan bias, as opposed to an attempt to be intellectually honest.

Should we be upset about the buy-American provisions in the stimulus bill? Is there an economic case for such provisions? The answer is yes and yes. And I do think it’s important to be honest about the second yes.

So Krugman not only thinks that there is an economic case for buy-American, but that it's important to stress it. And while we should "be upset" about the buy-American policy, that's just an emotional response-- the "economic case" is in favor of it.

The economic case against protectionism is that it distorts incentives: each country produces goods in which it has a comparative disadvantage, and consumes too little of imported goods. And under normal conditions that’s the end of the story.

But these are not normal conditions. We’re in the midst of a global slump, with governments everywhere having trouble coming up with an effective response.

Okay-- so the economic case against protectionism is not determinative here-- we are in a special situation.

And one part of the problem facing the world is that there are major policy externalities. My fiscal stimulus helps your economy, by increasing your exports — but you don’t share in my addition to government debt. As I explained a while back, this means that the bang per buck on stimulus for any one country is less than it is for the world as a whole.
And this in turn means that if macro policy isn’t coordinated internationally — and it isn’t — we’ll tend to end up with too little fiscal stimulus, everywhere.
Now ask, how would this change if each country adopted protectionist measures that “contained” the effects of fiscal expansion within its domestic economy? Then everyone would adopt a more expansionary policy — and the world would get closer to full employment than it would have otherwise. Yes, trade would be more distorted, which is a cost; but the distortion caused by a severely underemployed world economy would be reduced. And as the late James Tobin liked to say, it takes a lot of Harberger triangles to fill an Okun gap.
Let’s be clear: this isn’t an argument for beggaring thy neighbor, it’s an argument that protectionism can make the world as a whole better off. It’s a second-best argument — coordinated policy is the first-best answer. But it needs to be taken seriously.

Let me restate his argument. Every country needs fiscal stimulus because of the recession, and that's the most important thing. But countries won't enact fiscal stimulus unless they can be protectionist too, because they're selfish. So, since protectionism isn't as bad as lack of government spending, it's worth having trade barriers so as to get the government spending.

This is, actually, saying that beggar-thy-neighbor policies are a good thing. He is saying that if every country tries to beggar every other by buy-domestic policies, they'll all be better off in the end than if they didn't. He'd prefer having the same amount of government spending without the buy-domestic policies, but he doesn't think that's possible politically.

After a couple more paragraphs saying that we have to consider the political economy, we come to his bottom line:

But there is a short-run case for protectionism — and that case will increase in force if we don’t have an effective economic recovery program.

His argument has three problems (aside from its premise that the stimulus package is a good thing and should pass). First, it's not plausible that the stimulus package will shrink much if it is less protectionist, and his argument depends on there being enough shrinkage to counteract the bad allocative effect of protectionism. Second, if we're talking political economy, we should bring in the fact that allowing protectionism into a stimulus bill will result in it being more distorted to serve special interests rather than having the single objective of serving the public interest of Keynesian stimulus. Third, an economist should start by making the economic arguments clear, rather than mingling them with the politicking, compromise, and buying-off-of-interests arguments. Politics requires compromise, but an op-ed piece does not. In fact, even in politics, you start off the bargaining by taking your preferred position-- you don't start by offering your opponent something halfway towards his position. In fact, you might want to start with something more extreme than your preferred position.

In this particular case, of course, the buy-American provisions weren't in there to garner moderate and conservative support for a bill that wouldn't pass otherwise-- they were an actual hindrance towards compromise. Krugman's got it exactly backwards-- the buy-American was bad economics *and* bad politics.

Matthew Yglesias says that my stimulus proposal is "a pretty good idea" but also says "it’s wildly impractical" because it is "so outside the ballpark of what congress is prepared to consider."
Let me reply by quoting Milton Friedman:

The role of the economist in discussions of public policy seems to me to be to prescribe what should be done in light of what can be done, politics aside, and not to predict what is "politically feasible" and then to recommend it.

Selected Archive Topics >

I've set up this blog for myself, as a commonplace book, with the idea that it might
also be useful for outside readers. That is why the topics are idiosyncratic. I see that most of my readers are directed here
by Google searching rather than being regular readers.

I will delete rude comments, and will give less leeway to anonymous comments than to signed ones. I will for now at least
allow stupid and ill-informed comments, though other readers don't enjoy them unless they are so ignorant as to be funny.

I will revise my posts freely, usually without any note that they've been revised. If I make an important mistake in a post that I think
people might refer to, I will note the mistake and correction. But I'm not trying to make this a historical record. In fact, I'd like to merge posts on the same topic
and delete posts not of interest a year later, except that I never get round to doing that.